THE GERMAN BANKING SYSTEM
Banking Arrangements in Germany
[184]Various systems can be adopted in the banking profession for the transaction of business. The most lucrative method, at all events the one in which the power of large capital is most effectively turned to account, is that of the Rothschild firms, whose example was followed by many large private concerns at home and abroad. These firms avoid troublesome current business, maintain only a few connections, and concentrate their whole energies on isolated but important ventures and undertakings in which, owing to the large amount of means immediately required, no competition worth mentioning existed before the growth of capable joint-stock banks. Up to the middle of last century these firms actually possessed a monopoly so far as the loan issues of most European States were concerned, and they earned enormous profits according to present-day ideas. In the course of the last decades, however, this monopoly has been done away with so far as European States are concerned and only prevails to a limited extent in some foreign countries. Since that time the Rothschilds have devoted themselves to several large industrial enterprises, such as the Russian naphtha industry, the Spanish copper and quicksilver mines, etc.
Another system consists in the division of work and specialisation, customary in England, but which has been frequently abandoned of late. In England the issuing and syndicate business is carried on by special houses which, like Rothschild, do not call themselves bankers, but merchants. Brokers and jobbers carry on stock broking on the stock exchange and in the open market, the former (theoretically at least) on account of third persons and the latter on their own account. It is the exclusive business of other firms to place credit at the disposal of home and foreign firms by giving acceptance to bills. These firms, strange to say, are mostly of German origin (Frühling & Goschen, Frederik Huth & Co., Kleinwort & Sons, etc.), and carry on business in such a reliable manner that they are allowed to enter into bill obligations amounting to more than five times their estimated means. The clearing and deposit banks manage moneys on account of third parties.
It must be noted that the division of labour and its operation are based on free business practice in England without any legal compulsion. Consequently, no opposition is offered in that country to the different methods of carrying on business employed by the so-called foreign banks, i. e., the numerous branches of continental banks, including the branch offices of the Deutsche Bank, the Dresdner Bank, and the Disconto-Gesellschaft, despite the fact that their competition is unpleasant for the English institutions. In Germany, in consequence of business requirements and also of the small amount of capital in the country at the beginning of its modern economic development, the peculiar system has developed that credit banks combine all kinds of financial business (generally with the sole exception of mortgage-credit transactions), so that every customer can settle all his financial affairs in one spot on comparatively the cheapest terms possible.
Account-current transactions form the fundamental branch of business. The bank undertakes all the financial business of its client in return for a moderate commission on the turnover calculated on that side of the account which happens to be the greater, makes and receives payments, collects bills, checks, and other documents, and pays, or charges, interest on the balance, generally at 1 per cent. below the Reichsbank discount rate for credit balances and 1 per cent. above the Reichsbank discount rate for balances debited. The bank discounts the bills received by its customers, special arrangements being made as to the limit of the amount and terms, according to the quality of the bill, i. e., according to the trustworthiness of the other persons figuring on it. Should a customer require foreign bills to settle his liabilities abroad, i. e., checks or bills payable in the country concerned, the bank provides them from its own stock or draws bills or checks to the amount desired on its agents or correspondents in the country in question.
Should the debit balance not be a merely temporary one, or one soon covered by fresh receipts, the granting of special credit is necessary, and arrangements have to be made as to the amount and conditions of the same. Such credit is either covered or uncovered credit. The cover consists principally of current securities with a margin against fluctuations according to the nature of the security, and which is higher for shares than for securities bearing a fixed rate of interest. Uncovered credit is only granted in exceptional cases to others than business men—as a rule only to first-class mercantile firms of repute, whose affairs are in strict order.
Bankers and other firms with large cash transactions keep a so-called "cheque" account at their bank in addition to the chief account, in which no debit balances may occur; no interest is paid on the amount deposited, which is always kept in suitable proportion to the payments made, but, on the other hand, no turnover commission is charged.
Those customers are appreciated most who claim credit during their buying seasons, but who not only pay back the borrowed money during their selling season, but who have balances to their credit. This is the case with a great number of commercial firms and in many branches of industry, more especially in Berlin. The seasons in different branches occurring at different times of the year, it follows that a large bank, with branches and connections in all industrial parts of Germany, has the advantage of a suitable distribution of accounts among all branches of trade, etc., and the best possible adjustment of its debit and credit arrangements.
The debtors in a bank's balance sheet comprise not only those who have received advances of ready money but also those to whom the bank has granted credit by bill acceptance; the bill drawn by the debtor and accepted by the bank is discounted elsewhere. It is the duty of the drawer of the bill to cover it before it matures, and when the bill is accepted he is booked simultaneously as a debtor to the bank under the date of maturity.